State and Local Tax Alert - October 2015

North Carolina Expands Job Development Investment Grant Program and Makes Several Taxpayer-Friendly Sales and Use Tax Changes

Summary

On September 30, 2015, North Carolina Governor Pat McCrory signed into law H.B. 117, 2015-2016 Session (“H.B. 117”), which expands the Job Development Investment Grant (“JDIG”) Program and makes several taxpayer-friendly changes to North Carolina’s sales and use tax law as it relates to datacenters, aviation, motor vehicles, and motorsports. H.B. 117, together with H.B. 97, 2015-2016 Session (enacted September 18, 2015) (“H.B. 97”), reflects North Carolina’s desire to create a more favorable tax environment for businesses operating in the state, especially with respect to those businesses wishing to expand or relocate to the State. See the BDO SALT Alert that discusses H.B. 97.

Details

Expansion of Job Development Investment Grant Program

The purpose of the JDIG program is to stimulate economic activity and to create jobs in the state. A JDIG may be awarded to a business for a project in North Carolina that meets certain economic development criteria in relation to the area, whether a development tier one, two, or three area, where a project will be located, including the creation of a minimum number of “eligible positions” (i.e., positions created by a business and filled by new full-time employees in the State during a base period). The JDIG amount that may be awarded to a business is based on a percentage, as determined by the State based upon established criteria, of wage withholdings as it pertains to eligible positions over a period of years.

Some of the more notable changes to the program enacted under H.B. 117, which, except as otherwise noted, are effective July 1, 2015, include the following:

Increases the required minimum eligible positions for a development tier three area from 20 to 50, but leaves the required minimum positions for development tier one area at 10 and at 20 for a development tier two area.

Creates a new “high-yield project” category for which larger grant award amounts are allowed.For these purposes, a “high-yield project” is a project for which the business invests at least $500 million in private funds and creates at least 1,750 eligible positions.

Increases the maximum percentage of withholdings that may be used for purposes of determining the grant amount with respect to a development tier one area from 75 percent to 80 percent.However, H.B. 117 leaves the maximum percentage amount for development tier two and development tier three areas at 75 percent, and removes the 10 percent minimum that applies to all development tier areas.

With respect to a high-yield project, allows up to 100 percent of withholdings to be used for purposes of determining the grant amount, and applies a 20-year grant period as opposed to the standard 12 year period applied to other projects.

For an eligible position located in a development tier two area, increases the percentage of an annual grant that is allocable and payable to the business (as opposed to the State’s Industrial Development Fund Utility Account) to 90 percent.With respect to a high-yield project, the grant amount is fully allocable and payable to the business.

Increases the maximum total grants that may be awarded in any calendar year from $15 million to $20 million, but limits the amount that may be awarded in a single calendar year semiannual period to 50 percent of the maximum.The $20 million maximum amount increases to $35 million for a year in which a grant is awarded for a high-yield project.

Effective September 30, 2015, increases the State’s maximum liability cap under the program for the last six months of calendar year 2015 by $5 million.

Extends the program’s expiration date from January 1, 2016, to January 1, 2019.

Sales and Use Tax

Datacenters. Effective January 1, 2016, H.B. 117 provides an exemption for sales of electricity and datacenter support equipment for use at a datacenter where at least $75 million within a 5-year period beginning on or after January 1, 2012, has been or will be invested.

Aviation. Effective October 1, 2015, H.B. 117 applies the 4.75-percent general rate of tax, plus local tax, to the gross receipts from the sale of aviation gasoline and jet fuel but, until December 31, 2019, exempts sales of aviation gasoline and jet fuel to an interstate air business for use in a commercial aircraft. In addition, H.B. 117: (i) applies the 4.75-percent general rate of tax to the gross receipts from the sale of certain jet engines, (ii) increases the rate of tax applied to the gross receipts from the sale of an aircraft from a special 3-percent rate of tax to the 4.75-percent general rate of tax, and (iii) increases the maximum tax per sale of aircraft from $1,500 to $2,500. Lastly, H.B. 117 exempts the sale of a service contract, and related parts and accessories, applicable to a jet engine to which the 4.75-percent general rate of tax may be applied, and the sale of an aircraft with a maximum take-off weight between 9,000 and 15,001 pounds.

Manufactured and Modular Homes. Effective October 1, 2015, H.B. 117 applies the 4.75-percent general rate of tax to the gross receipts from the sale of a manufactured and a modular home, including to the gross receipts from the sale of a modular home to a modular homebuilder. H.B. 117 allows a seller of a modular home a credit against the tax for sales tax paid to another state on tangible personal property incorporated in the modular home.

Motor Vehicles. Effective March 1, 2016, H.B. 117 applies the service contract exemption to a contract applicable to a motor vehicle, a motor vehicle body to be mounted on a motor vehicle chassis when a certificate of title has not been issued for the chassis, and a motor vehicle body mounted on a motor vehicle chassis that temporarily enters the State so the manufacturer of the body can mount the body on the chassis. In addition, H.B. 117 exempts the sale of a replacement item, a repair part, and a service to repair or maintain tangible personal property or a motor vehicle pursuant to a manufacturer’s or dealer’s warranty. The sale of repair and maintenance services related to a motor vehicle are otherwise subject to tax.

Motorsports. Effective September 30, 2015, and through December 31, 2019, H.B. 117 exempts the sale of an engine provided with an operator to a professional motorsports racing team or a related member of the team for use in competition in a sanctioned race series. However, H.B. 117 applies the same January 1, 2020, expiration date, to the service contract exemption related to an item purchased by a professional motorsports racing team.

BDO Insights

A business expecting to expand or relocate to North Carolina should at least consider applying for the JDIG program.

Taxpayers will need to assess to what extent (and when) their sales and use tax reporting and payment systems require change in light of the changes to the sales and use tax law enacted under H.B. 117.

For more information, please contact one of the following regional practice leaders: